Sanctions Accelerate Inflation

Sanctions and the decline of the ruble have caused inflation rates in Russia to exceed the Ministry of Economic Development's official projection and to hit a three-year maximum. Furter weakening of the ruble will lead to the continued growth of annual inflation, according to the HSE's New Comments on the State and Business

The annual inflation rate rose from 7.5% in August to 8.1% in September, reaching a new 37-month maximum and exceeding the MED's 7.5% official projection, due to the dramatic acceleration of the current inflation rate from 0.2% to 0.7% in September. The causes of this include the impact of sanctions combined with the weakening ruble, as well as seasonal factors.

Table 1. Key indicators of inflation,%

	2013				2014
	Sep	Oct	Nov	Dec	Jan	Feb	Mar	Apr	May	Jun	Jul	Aug	Sep
In monthly increments
Inflation	0.2	0.6	0.6	0.5	0.6	0.7	1	0.9	0.9	0.6	0.5	0.2	0.7
Core inflation (Rosstat)	0.7	0.6	0.6	0.4	0.4	0.5	0.8	0.9	0.9	0.8	0.6	0.6	0.9
Core inflation (CfD)	0.6	0.5	0.5	0.4	0.4	0.5	0.8	0.9	0.9	0.7	0.5	0.6	0.8
Core inflation (Rosstat), s. adj.	0.5	0.6	0.6	0.5	0.4	0.5	0.8	1	1	0.9	0.7	0.6	0.7
Core inflation (CfD), s. adj., incl.	0.5	0.4	0.5	0.5	0.4	0.5	0.7	0.9	1	0.9	0.7	0.7	0.7
food products, s. adj.	0.7	0.4	0.5	0.5	0.5	0.6	1.1	1.4	1.8	1.5	1	1	1.2
non-food products, s. adj.	0.3	0.3	0.4	0.3	0.2	0.3	0.5	0.5	0.5	0.4	0.4	0.4	0.4
services, s. adj.	0.6	0.5	0.7	0.6	0.6	0.7	0.5	0.9	0.6	0.6	0.5	0.5	0.4
Non-food core inflation (CfD), s. adj.	0.4	0.3	0.4	0.4	0.3	0.4	0.5	0.6	0.5	0.5	0.4	0.4	0.4
In annual increments
Inflation	6.1	6.3	6.5	6.5	6.1	6.2	6.9	7.3	7.6	7.8	7.4	7.5	8
Core inflation (Rosstat)	5.5	5.5	5.6	5.6	5.5	5.5	6	6.5	7	7.5	7.8	8	8.2
Core inflation (CfD)	4.8	4.7	4.7	4.8	4.7	4.9	5.3	5.9	6.5	7	7.3	7.5	7.8

Note: s. adj. -- seasonally adjusted. In the HSE CfD's methodology, core inflation (CCPI) does not include the price changes of certain foods, such as fruit and vegetables, eggs, and alcohol; nonfood items, such as gasoline, furs, and tobacco; and services such as transportation, housing, utilities, education, extended health care (sanatoriums and spas), and pre-school education.
Source: CEIC Data, estimates by the HSE's Centre for Development

The second month of Russia's counter-sanctions was marked by the continued acceleration of seasonally adjusted food inflation to 1.6%, compared to 0.9% in August and 0.4% in July.

Graph 1. Prices of food and non-food products (increase to previous month, seasonally adjusted), %

 

Source: CEIC Data, estimates by the HSE's Centre for Development

It comes as no surprise that those items affected by sanctions are the main contributors to the dramatic acceleration of inflation. Thus, the seasonally adjusted increase in fruit and vegetable prices in September alone (!) stood at 6.2%, compared to 1.7% in August and to -3 ... -7% between May and July.

Likewise, accelerated price growth affected meat and poultry (up to 2.3% in September from 2.1% in August and 1.5% in July) and fish and seafood (up to 1.8% from 1.4% in August and 1.0% in July).

Sanctions also caused a rise in cheese prices, since the banned imports made up 30% of Russia’s consumption of cheese; however, the price growth of liquid dairy products slowed down to 0.4% per month in August and September, and the price of butter stopped growing altogether—perhaps due to the accelerated decline in milk prices in the global food market since spring.

Nevertheless, the combined seasonally adjusted price index of food items affected by sanctions increased sharply from 0.8% in July and 1.4% in August up to 2.6% in September, and its contribution to consumer inflation rose from 0.2 percentage points in August to 0.37 percentage points in September. In all likelihood, in the absence of sanctions and the ruble's decline, food prices would have dropped, thus lowering inflation, as it was the case earlier this year, when after a sharp increase in dairy and fruit and vegetable prices, the trend changed in May, and prices went down.

Graph 2. The price index of foods affected by sanctions (July 2014 = 100%, seasonally adjusted), %

 

Note: The index is calculated for the following product groups: meat and poultry, fish and seafood, milk and dairy, butter, cheeses, fruits and vegetables. The weighting is performed using the Rosstat's tool for consumer price index calculations.
Source: CEIC Data, Rosstat, estimates by the HSE's Centre for Development

In contrast, the seasonally adjusted prices of non-food items have stabilised. After peaking at 0.6% during the first wave of the ruble's decline in March and April, price increases slowed down to 0.4% in August and September. Apparently, retailers find it unfeasible to raise consumer prices due to stagnation affecting both food and non-food retail sectors, and the ruble's new decline since mid-July has not yet affected price tags.

International tourism has been particularly hit by the lowered demand: tour prices followed the exchange rate during the first wave of the ruble’s devaluation, but have almost stopped changing much since May. It should be noted, however, that widespread bankruptcies of tour operators earlier this year may have contributed to the drop in demand for tours.

Graph 3. RUR/USD exchange rate trend

 

Source: Bank of Russia.

Inflation will grow in the coming months.

First, the price of items affected by sanctions will continue to go up, except perhaps for a slight slowdown in price growth of certain fruits and vegetables by November-December.

Second, the 40 rubles/dollar exchange rate (compared to 37 rubles/dollar in early September) will inevitably lead to a new inflationary surge.

All things considered, we can expect inflation to reach 8.5% by the year-end, followed by similar annual rates in early 2015.

If sanctions are lifted and the ruble exchange rates stabilise, we can expect inflation to stand at 5.8% in 2015, but it will exceed 6.5% with continued mutual sanctions and the ruble's five-percent devaluation.

 

October 08, 2014